Mutual Fund Redemption Fees Rising

by Philip Morton, Investors Offshore.com

16 July 2001

According to a recent study conducted by Financial Research Corp., investors who sell mutual funds within months, or sometimes even years of purchase are increasingly paying a higher price to exit, especially if the fund invests overseas or in just one sector.

This is bad news for investors who, having barely survived the recent market volatility, decide to cut their losses, only to find their already slim return nibbled round the edges by punitive redemption fees. Evidence gathered by the US based research company suggests that the number of mutual funds charging redemption fees rose 82% between December 1999 and March 2001, a figure which has alarmed and angered many smaller investors.

Redemption fees are collected from mutual fund shareholders who cash in shares before the end of a specified period, and usually account for something like 1.13% of the sales transaction. The fees are imposed to discourage short term investment in mutual funds, which fund companies say raises costs by increasing the number of times a fund manager has to sell or readjust a portfolio to meet the redemption request.

Mutual fund investors say that they can see the logic in this argument, but are objecting to the strict adherence to the letter of the law being demonstrated by the fund managers. 'While charging a redemption fee for maybe the first few months after a purchase may be justified in reducing costs, I don't see how it is when we're talking about charging fees after a year,' said Mercer Bullard, founder of the shareholders rights group Fund Democracy.

The FRC study found that overseas and sector funds were among the biggest offenders, on account of their greater volatility, which could make them more tempting to switch out of. However, mutual fund companies are resolute. 'Our investors have not complained because they realise the fees are in place to help insulate them, so they don't subsidise this type of trading,' said Vanguard spokesman, John Demming. Vanguard charges redemption fees on 17 of its 109 offerings.

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